The strength of Proctor & Gamble (PG) relative to competitors is its diverse portfolio of products consisting of commonly recognized brands. Diversity of product categories and geographic reach provide the company with more than $80 billion of annual revenue.
In addition, Proctor & Gamble maintains a focus on product innovation that contributes fresh additions to its business lines. Recent research and development spending totaled about $2 billion annually
These factors give Proctor & Gamble a benefit of scale and cost savings opportunities unequaled by its peers. The company holds brand strength with both consumers and retailers.
However, the business segments of Proctor & Gamble are not without risk. The greatest threat is exposure to rising commodity costs. This phenomenon can rapidly alter profit margins when combined with difficulty in raising product prices to consumers. Inflated costs of recent years for many of the company’s inputs, such as resin, have depressed profit margins.
Secondly, the company’s growth prospects are limited by maturity of the US market and economic weakness in Europe. Slowing sales in those regions hinder progress at Proctor & Gamble. Sales in emerging markets are critical to a future of rising profits. Lastly, any failure of new products – such as Tide PODS – to gain acceptance by consumers would present a burden on company profitability.
The market for consumer products in 2012 is significantly impacted by sensitivity to prices among shoppers. With continued high unemployment and low wage growth in the US, companies such as Proctor & Gamble face considerable resistance to price increases. This presents an opportunity for low priced suppliers to gain market share. Proctor & Gamble competes with this situation by providing marketing support to retailers and relying upon introduction of improved products.
The household products market segment in which Proctor & Gamble operates is especially competitive due to struggle for shelf space against private label store brand products. This leverage by large retailers has constrained the ability of Proctor & Gamble to raise prices. Moreover, as retail chains in developed countries control a rising percentage of final sales, they are exercising purchasing strength with suppliers such as Proctor & Gamble. However, large retail operations tend to carry leading brands to meet consumer demand.
Economic growth and changing lifestyles in developing countries provide substantial expansion opportunities. Consumers in emerging foreign markets are purchasing packaged products that were unaffordable to them in the past. Developing and emerging markets represent the greatest long-term opportunity for Proctor & Gamble.
A smaller contribution to rising sales is introduction of innovative products in developed markets. Ideally, this is expected to improve profit margin. However, that impact is undercut by rising commodity costs. Essential raw materials used by household products companies include pulp, resin, natural gas, and crude oil.
The stocks of consumer staples companies, such as Proctor & Gamble, are traditionally defensive oriented holdings. Recent stability in the US economy is causing investors to shift toward more aggressive sectors.
Consumer staples have defensive characteristics because demand for the products tends to remain relatively constant under all economic conditions. This limits growth prospects when the economy improves. Hence, investors seeking to capitalize on a rising economic environment search for growth opportunities in stocks of other sectors.
Further hampering consumer staples companies are typically low profit margins for their products. Plus, as consumers have learned to stretch their limited incomes during the slow economy, they have increasingly purchased lower priced options within the household products category.
Nevertheless, several positives exist for the stock of consumer staples companies. Increasing costs for commodity inputs have abated in recent months. Wage costs per production unit have also declined. Both of these factors provide support for profit margins. Additionally, signs of a continued slow growth environment favor defensive staples.
A Proctor & Gamble competitor for several types of products is Kimberly-Clark Corporation (KMB). Higher commodity costs have exerted margin pressure at Kimberly-Clark just as Proctor & Gamble experienced. Cost reduction programs at Kimberly-Clark helped offset the adverse impact of rising cost for inputs. But, the product diversity of Proctor & Gamble is more extensive than Kimberly-Clark.
Unilever (UN) is another consumer products company recently affected by commodity cost concerns. However, advertising and promotion as well as product innovation have increased consumer recognition for many Unilever brands in recent years. The next hurdle for Unilever is developing a pricing strategy that maintains profit margin while capturing market share. This is particularly challenging in emerging markets, where inflating prices are already affecting household budgets. Unilever stumbled in 2008 when price hikes curtailed sales volume.
Proctor & Gamble has an edge over its competitors in 2012 due to a broader diversity of products and a scale that permits cost containment while extending popularity for its brands in emerging markets plus innovative items in developed markets.
About the author:Buy low and sell high is easier in theory than in practice– and that’s where we come in.
At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.
If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.